Business
Stock Dividend
A stock dividend is a distribution of additional shares to existing shareholders, usually in proportion to the number of shares they already own. It is a way for a company to reward its shareholders without using cash. Stock dividends are often used to signal a company's confidence in its future performance and can also increase the liquidity of the company's shares.
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12 Key excerpts on "Stock Dividend"
eBook - PDF- Carl Warren, Jefferson Jones, William Tayler, , Carl Warren, Jefferson Jones, William Tayler, Ph.D., CMA, Carl Warren, Jefferson Jones, William Tayler(Authors)
- 2019(Publication Date)
- Cengage Learning EMEA(Publisher)
Stock Dividends A Stock Dividend is a distribution of shares of stock to stockholders. Stock Dividends are normally declared only on common stock and issued to common stockholders. A Stock Dividend affects only stockholders’ equity. Specifically, the amount of the Stock Dividend is transferred from Retained Earnings to Paid-In Capital. The amount transferred is normally the fair value (market price) of the shares issued in the Stock Dividend. 7 To illustrate, assume that the stockholders’ equity accounts of Hendrix Corporation as of December 15 are as follows: Common Stock, $20 par (2,000,000 shares issued) $40,000,000 Paid-In Capital in Excess of Par—Common Stock 9,000,000 Retained Earnings 26,600,000 On December 15, Hendrix Corporation declares a Stock Dividend of 5% or 100,000 shares (2,000,000 shares × 5%) to be issued on January 10 to stockholders of record on December 31. The market price of the stock on December 15 (the date of declaration) is $31 per share. The entry to record the Stock Dividend is as follows: Dec. 15 Stock Dividends 3,100,000 Stock Dividends Distributable 2,000,000 Paid-In Capital in Excess of Par—Common Stock Declared 5% (100,000 shares) Stock Dividend on $20 par common stock with a market price of $31 per share. 1,100,000 After the preceding entry is recorded, Stock Dividends will have a debit balance of $3,100,000. Like cash dividends, the Stock Dividends account is closed to Retained Earnings at the end of the accounting period. This closing entry debits Retained Earnings and credits Stock Dividends. At the end of the period, the Stock Dividends distributable and paid-in capital in excess of par— common stock accounts are reported in the “Paid-in capital” section of the balance sheet. Thus, the effect of the preceding Stock Dividend is to transfer $3,100,000 of retained earnings to paid-in capital. On January 10, the Stock Dividend is distributed to stockholders by issuing 100,000 shares of common stock.
eBook - PDF- Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
In these cases, liquidation may take place over a number of years to ensure an orderly and fair sale of assets. For example, when Overseas National Airways dissolved, it agreed to pay a liquidating dividend to its stockholders over a period of years equivalent to $8.60 per share. Each liquidating dividend payment reduces paid-in capital. Stock Dividends and Stock Splits What if a company has been profitable but wants to conserve cash or perhaps lacks sufficient cash to pay a cash dividend? Another way to “reward” stockholders is with a Stock Dividend or a stock split. Stock Dividends If management wishes to “capitalize” part of the earnings (i.e., reclassify amounts from earned to contributed capital) and thus retain earnings in the business on a permanent basis, it may issue a Stock Dividend. In this case, the company distributes no assets. Each stockholder maintains exactly the same proportionate interest in the corporation and the same total book value after the company issues the Stock Dividend. Of course, the book value per share is lower because each stockholder holds more shares. 14-30 CHAPTER 14 Stockholders’ Equity A Stock Dividend therefore is the issuance by a corporation of its own stock to its stock- holders on a pro rata basis, without receiving any consideration. In recording a Stock Dividend, some believe that the company should transfer the par value of the stock issued as a div- idend from retained earnings to capital stock. Others believe that it should transfer the fair value of the stock issued—its market value at the declaration date—from retained earnings to capital stock and additional paid-in capital. The fair value position was adopted, at least in part, in order to influence the stock div- idend policies of corporations. Evidently in 1941, both the New York Stock Exchange and many in the accounting profession regarded periodic Stock Dividends as objectionable.
eBook - PDF- Carl Warren, Christine Jonick, Jennifer Schneider, , Carl Warren, Carl Warren, Christine Jonick, Jennifer Schneider(Authors)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
8 The use of fair market value is justified as long as the number of shares issued for the Stock Dividend is small (less than 25% of the shares outstanding). Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 646 Chapter 13 Corporations: Organization, Stock Transactions, and Dividends On December 31, the Stock Dividends distributable and paid-in capital in excess of par—common stock accounts are reported in the Paid-In Capital section of Hendrix Corporation’s balance sheet. The effect of the preceding Stock Dividend is to transfer $3,100,000 of retained earnings to paid-in capital. On January 10, the Stock Dividend is distributed to stockholders by issuing 100,000 shares of common stock. The issuance of the stock is recorded by the following entry: Jan. 10 Stock Dividends Distributable 2,000,000 Common Stock 2,000,000 Issued stock as Stock Dividend. A Stock Dividend does not change the assets, liabilities, or total stockholders’ equity of a corporation. Likewise, a Stock Dividend does not change an individual stockholder’s proportionate interest (equity) in the corporation. To illustrate, assume that a stockholder owns 1,000 of a corporation’s 10,000 shares outstanding.
eBook - PDF- Carl Warren, James Reeve, Jonathan Duchac, , Carl Warren, James Reeve, Jonathan Duchac(Authors)
- 2017(Publication Date)
- Cengage Learning EMEA(Publisher)
A Stock Dividend does not change the assets, liabilities, or total stockholders’ equity of a corporation. Likewise, a Stock Dividend does not change an individual stockholder’s proportionate interest (equity) in the corporation. To illustrate, assume that a stockholder owns 1,000 of a corporation’s 10,000 shares outstanding. If the corporation declares a 6% Stock Dividend, the stockholder’s proportionate interest will not change, computed as follows: Before Stock Dividend After Stock Dividend Total shares issued 10,000 10,600 [10,000 + (10,000 × 6%)] Number of shares owned 1,000 1,060 [1,000 + (1,000 × 6%)] Proportionate ownership 10% (1,000 ÷ 10,000) 10% (1,060 ÷ 10,600) Obj. 4 Vienna Highlights Corporation has 150,000 shares of $100 par common stock outstanding. On June 14, Vienna Highlights declared a 4% Stock Dividend to be issued August 15 to stockholders of record on July 1. The market price of the stock was $110 per share on June 14. Journalize the entries required on June 14, July 1, and August 15. Follow My Example 13-4 June 14 Stock Dividends (150,000 shares × 4% × $110) . . . . . . . . . . . . . . . . . . . 660,000 Stock Dividends Distributable (6,000 shares × $100) . . . . . . . . . . 600,000 Paid-In Capital in Excess of Par—Common Stock . . . . . . . . . . . . . . 60,000 July 1 No entry required. Aug. 15 Stock Dividends Distributable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 Practice Exercises: PE 13-4A, PE 13-4B Example Exercise 13-4 Entries for Stock Dividends Stock Splits A stock split is a process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares. A stock split applies to all common shares including the unissued, issued, and treasury shares.
No longer available |Learn more- Carl Warren, James Reeve, Jonathan Duchac(Authors)
- 2017(Publication Date)
- Cengage Learning EMEA(Publisher)
A Stock Dividend does not change the assets, liabilities, or total stockholders’ equity of a corporation. Likewise, a Stock Dividend does not change an individual stockholder’s proportionate interest (equity) in the corporation. To illustrate, assume that a stockholder owns 1,000 of a corporation’s 10,000 shares outstanding. If the corporation declares a 6% Stock Dividend, the stockholder’s proportionate interest will not change, computed as follows: Before Stock Dividend After Stock Dividend Total shares issued 10,000 10,600 [10,000 + (10,000 × 6%)] Number of shares owned 1,000 1,060 [1,000 + (1,000 × 6%)] Proportionate ownership 10% (1,000 ÷ 10,000) 10% (1,060 ÷ 10,600) Obj. 4 Vienna Highlights Corporation has 150,000 shares of $100 par common stock outstanding. On June 14, Vienna Highlights declared a 4% Stock Dividend to be issued August 15 to stockholders of record on July 1. The market price of the stock was $110 per share on June 14. Journalize the entries required on June 14, July 1, and August 15. Follow My Example 13-4 June 14 Stock Dividends (150,000 shares × 4% × $110) . . . . . . . . . . . . . . . . . . . 660,000 Stock Dividends Distributable (6,000 shares × $100) . . . . . . . . . . 600,000 Paid-In Capital in Excess of Par—Common Stock. . . . . . . . . . . . . . 60,000 July 1 No entry required. Aug. 15 Stock Dividends Distributable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600,000 Practice Exercises: PE 13-4A, PE 13-4B Example Exercise 13-4 Entries for Stock Dividends Stock Splits A stock split is a process by which a corporation reduces the par or stated value of its common stock and issues a proportionate number of additional shares. A stock split applies to all common shares including the unissued, issued, and treasury shares.
eBook - ePub- Barry J. Epstein, Ralph Nach, Steven M. Bragg(Authors)
- 2009(Publication Date)
- Wiley(Publisher)
Liquidating dividends. Liquidating dividends are not distributions of earnings, but rather a return of capital to the investing shareholders. A liquidating dividend is normally recorded by the declarer through charging additional paid-in capital rather than retained earnings. The exact accounting for a liquidating dividend is affected by the laws where the business is incorporated, and these laws vary from state to state.Stock Dividends. Stock Dividends represent neither an actual distribution of the assets of the corporation nor a promise to distribute those assets. For this reason, a Stock Dividend is not considered a legal liability or a taxable transaction.Despite the recognition that a Stock Dividend is not a distribution of earnings, the accounting treatment of relatively insignificant Stock Dividends (defined as being less than 20% to 25% of the outstanding shares prior to declaration) is consistent with it being a real dividend. Accordingly, retained earnings are debited for the fair market value of the shares to be paid as a dividend, and the capital stock and additional paid-in capital accounts are credited for the appropriate amounts based upon the par or stated value of the shares, if any. A Stock Dividend declared but not yet paid is classified as such in the stockholders’ equity section of the balance sheet. Since such a dividend never reduces assets, it cannot be a liability.The selection of 20% to 25% as the threshold for recognizing a Stock Dividend as an earnings distribution is arbitrary, but it is based somewhat on the empirical evidence that small Stock Dividends tend not to result in a reduced market price per share for outstanding shares. The aggregate value of the outstanding shares should not change, but the greater number of shares outstanding after the Stock Dividend should necessitate a lower per share price. As noted, however, the declaration of small Stock Dividends tends not to have this impact, and this phenomenon supports the accounting treatment.On the other hand, when Stock Dividends are larger in magnitude, it is observed that per share market value declines after the declaration of the dividend. In such situations, it would not be valid to treat the Stock Dividend as an earnings distribution. Rather, it should be accounted for as a split. The precise treatment depends upon the legal requirements of the state of incorporation and upon whether the existing par value or stated value is reduced concurrent with the stock split.
eBook - PDF- Carl Warren, Jeff Jones, Amanda Farmer, , Carl Warren, Carl Warren, Jeff Jones, Amanda Farmer(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
Is this proper or ethical? Apparently, the dean of the Business School didn’t think so. In a statement to the press, the dean stated: “I have instructed anyone affili- ated with the (index) not to make personal use of infor- mation gathered in the course of producing the quarterly index, prior to the index’s release to the general public, and they [the researchers] have agreed.” Sources: Jon E. Hilsenrath and Dan Morse, “Researcher Uses Index to Buy, Short Stocks,” The Wall Street Journal, February 18, 2003; and Jon E. Hilsenrath, “Satisfaction Theory: Mixed Results,” The Wall Street Journal, February 19, 2003. Stock Dividends A Stock Dividend is a distribution of shares of stock to stockholders. Stock Dividends are normally declared only on common stock and issued to common stockholders. The effect of a Stock Dividend on the stockholders’ equity of the issuing corporation is to transfer retained earnings to paid-in capital. For public corporations, the amount transferred from the retained earnings account to the paid-in capital account is normally the fair value (market price) of the shares issued in the Stock Dividend. 5 5. The use of fair market value is justified as long as the number of shares issued for the Stock Dividend is small (less than 25% of the shares outstanding). 393 Copyright 2022 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
eBook - ePub- (Author)
- 2021(Publication Date)
- Wiley(Publisher)
Madden (2008) support an attitude of caution with respect to very high dividend yields. Madden examined yields for the 1,963 stocks in the MSCI World Index. His company classified 865 companies out of the 1,963 companies as a “High Dividend Universe” (HDU). In the early months of the economic decline, Madden found that 78.6% of the companies in the HDU had questionable ability to maintain their dividend payments as compared with 30.7% of all the companies in the MCSI World Index. This point is supported by more recent evidence. Research using data for the S&P 500 Index stocks from 2005 to 2015 shows that the top 5% of dividend-yielding stocks accounted for over 8% of the bottom decile of performance. This over-representation of very high dividend-yielding stocks in the bottom decile of performance is likely attributable to deteriorating corporate fundamentals resulting in non-sustainable dividends. Similarly, in 2016 analysts became concerned that many European companies’ dividends were unsustainable because they were paying out the highest proportion of their earnings as dividends in decades (a 60% payout ratio) at a time when their earnings were declining. This caused some companies to change their policies and cut dividends for future reinvestment and balance sheet improvement.Summary
A company’s cash dividend payment and share repurchase policies constitute its payout policy. Both entail the distribution of the company’s cash to its shareholders affect the form in which shareholders receive the return on their investment. Among the points this reading has made are the following:-
Dividends can take the form of regular or irregular cash payments, Stock Dividends, or stock splits. Only cash dividends are payments to shareholders. Stock Dividends and splits merely carve equity into smaller pieces and do not create wealth for shareholders. Reverse stock splits usually occur after a stock has dropped to a very low price and do not affect shareholder wealth.
eBook - ePubCorporate Finance
A Practical Approach
- Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
- 2012(Publication Date)
- Wiley(Publisher)
4.3. Global Trends in Payout Policy- For the past three years SCII has been making share repurchases, so investors are already cognizant that management is distributing cash to shareholders. The initiation of a dividend as a continuation of that policy is less likely to be interpreted as an information signaling event.
Solution to 2. A Stock Dividend has no effect on shareholder wealth. A shareholder owns the same percentage of the company and its earnings as it did before the Stock Dividend. All other things being equal, the price of a stock will decline to reflect the Stock Dividend, but the decline will be exactly offset by the greater number of shares owned.Solution to 3. As shown in the Statement of Cash Flows, the $0.40 a share annual dividend reflects a total amount of $15 million, fully using SCII’s free cash flow after acceptance of positive NPV projects. The proposal brought before the board does not suggest a commitment to maintain the annual dividend at $0.40 a share (or greater), as a stable dividend policy would typically imply. Rather, the funding of profitable capital projects will first be considered. These facts taken together are most consistent with a residual dividend policy.An interesting question is whether corporations are changing their dividend policies in response to changes in the economic environment and in investor preferences. In 2001, Fama and French36 investigated the case of disappearing dividends in the United States. They found a large decline in the number of U.S.-based industrial companies that paid dividends from 1978 to 1998. But the aggregate payout ratio in the 1990s was about 40 percent, within the 40–60 percent range typical of the 1960–1998 period. Fama and French argued that the decline in dividends was related to the large number of relatively unprofitable companies that were assuming prominence in the stock market. DeAngelo, DeAngelo, and Skinner37
eBook - PDF- Carl Warren, Christine Jonick, Jennifer Schneider, , Carl Warren, Christine Jonick, Jennifer Schneider(Authors)
- 2020(Publication Date)
- Cengage Learning EMEA(Publisher)
Although net income for the current year is sufficient to pay the preferred dividend of $150,000 each quarter and a common dividend of $90,000 each quarter, the board of directors declares dividends only on the preferred stock. Suggest possible reasons for pass-ing the dividends on the common stock. 4. An owner of 2,500 shares of Simmons Company common stock receives a Stock Dividend of 50 shares. a. What is the effect of the Stock Dividend on the stockholder’s proportionate interest (equity) in the corporation? b. How does the total equity of 2,550 shares com-pare with the total equity of 2,500 shares before the Stock Dividend? 5. a. Where should a declared but unpaid cash divi-dend be reported on the balance sheet? b. Where should a declared but unissued Stock Dividend be reported on the balance sheet? 6. What is the primary purpose of a stock split? 7. A corporation reacquires 60,000 shares of its own $10 par common stock for $3,000,000, recording it at cost. a. What effect does this transaction have on reve-nue or expense of the period? b. What effect does it have on stockholders’ equity? 8. The treasury stock in Discussion Question 7 is resold for $3,750,000. a. What is the effect on the corporation’s revenue of the period? b. What is the effect on stockholders’ equity? 9. What are the three classifications of restrictions of retained earnings, and how are such restrictions normally reported on the financial statements? 10. Indicate how prior period adjustments should be reported on the financial statements presented only for the current period. Key Terms Discussion Questions Copyright 2021 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience.
eBook - PDFDividend Policy
Theory and Practice
- George Frankfurter, Bob G. Wood, James Wansley(Authors)
- 2003(Publication Date)
- Academic Press(Publisher)
As noted at the beginning of Chapters 2 and 3, the original payments to joint stock company shareholders in Holland and Great Britain were liquidating distributions of capital and profit that terminated the joint stock enterprise’s existence. Later payments were limited to the net profits of the undertakings that permitted a more efficient use of investment capital and gave the firms perpet-ual existence. Over the better part of the late 20th century the payments have become symbolic liquidations solely determined by managers; dividends are paid to shareholders from a combination of profits from the current period and earn-ings retained in previous profitable periods. Although largely symbolic, the con-tinued importance of a consistent and significant dividend payment to maintain shareholder contentment remains a managerial priority. It seems that the corporation progressed from its original liquidating div-idend, to distribution of all profits (retaining some capital), to a token dividend payment, the size and frequency of which are left to the discretion of manage-ment. At the same time, alternative schemes of distribution (such as repurchase of stock, green mail, etc.) and quasi-distributions (such as Stock Dividends and splits) have been devised and accepted. These subjects are discussed in later chapters of this book. Clearly,this evolution could not have occurred in a vacuum. It has been par-alleled, if not precipitated, by the systematic removal of the owners from manage-ment, i.e., the separation of control from ownership. Hence, it is not totally illogical to presume that the payment of dividends, especially those that are undoubtedly symbolic (because of their magnitude relative to the value of the share itself ), is a ritual performed by managers to show good faith toward the owners. Adam Smith is perhaps the first to express this view.
eBook - PDF- Scott Besley, Eugene Brigham, Scott Besley(Authors)
- 2021(Publication Date)
- Cengage Learning EMEA(Publisher)
All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. dividend payments are more certain than the future cap- ital gains that might result when a firm retains earnings to invest in growth opportunities. If this logic is correct, the required return on equity, r s , should decrease as the dividend payout is increased, causing the firm’s stock price to increase. 2 Another factor that might cause investors to prefer a particular dividend policy is the tax effect of dividend receipts. Investors must pay taxes at the time dividends and capital gains are received. Thus, depending on his or her tax situation, an investor might prefer either a payout of current earnings as dividends, which would be taxed in the current period, or the capital gains associated with growth in stock value, which would be taxed when the stock is sold, perhaps many years in the future. Investors who prefer to delay the impact of taxes would be willing to pay more for companies with low dividend payouts than for otherwise similar high dividend-payout compa- nies, and vice versa. Those who believe the firm’s dividend policy is relevant are proponents of the dividend relevance theory, which asserts that dividend policy can affect the value of a firm through investors’ preferences. Although academic researchers have studied the div- idend policy issue extensively, they cannot tell corporate decision makers exactly how dividend policy affects stock prices and capital costs.
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